TODAY’S STUDY: THE LATEST ON THE COST OF WIND

The newest comparisons of the costs for building new electricity generation (levelized cost of electricity, LCOE) put wind in the lowest price category. Estimated at as low as 40-odd dollars per megawatt-hour, wind is only challenged by natural gas.

Once again, NewEnergyNews is forced to ask: When does an alternative energy become a mainstream energy?

Wind has supplied an average of 35% of new U.S. power capacity over the last five years, second only to natural gas. In many states, wind provides well over 10% of the electricity and, in the country as a whole, wind now provides well over 2% of the power. The only thing keeping it from providing more is the time needed to build it.

Wind is cheaper, it is emissions-free, it has a predictable and reliable (though variable) capacity factor, and its fuel is free. The logic of it is undeniable and regardless of what kind of energy it is called, the market is choosing it.

In short, either natural gas is also an alternative energy or wind is not.

Multi-National Case Study of the Financial Cost of Wind Energy
Paul Schwabe, Sander Lensink, Maureen Hand, et. al., March 2011 (National Renewable Energy Laboratory)

Executive Summary

The lifetime cost of wind energy is comprised of a number of components including the investment cost, operation and maintenance costs, financing costs, and annual energy production. Accurate representation of these cost streams is critical in estimating a wind plant’s cost of energy. Some of these cost streams will vary over the life of a given project. From the outset of project development, investors in wind energy have relatively certain knowledge of the plant’s lifetime cost of wind energy. This is because a wind energy project’s installed costs and mean wind speed are known early on, and wind generation generally has low variable operation and maintenance costs, zero fuel cost, and no carbon emissions cost. Despite these inherent characteristics, there are wide variations in the cost of wind energy internationally, which is the focus of this report.

Using a multi-national case-study approach, this work seeks to understand the sources of wind energy cost differences among seven countries under International Energy Agency (IEA) Wind Task 26 – Cost of Wind Energy. The participating countries in this study include Denmark, Germany, the Netherlands, Spain, Sweden, Switzerland, and the United States. Due to data availability, onshore wind energy is the primary focus of this study, though a small sample of reported offshore cost data is also included.

This report consists of two principal components. First, an overview and cross-country comparative analysis of the cost of wind energy is presented. The report then proceeds with a series of country-specific case studies that describe the unique cost elements of a typical wind energy facility in each of the represented countries.

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For this analysis, we considered the levelized cost of energy (LCOE) as the primary metric for describing and comparing wind energy costs from country to country. The LCOE represents the sum of all costs over the lifetime of a given wind project, discounted to present time, and levelized based on annual energy production. The LCOE does not include any residual costs or benefits incurred beyond the project’s assumed operational life.

The levelized cost of energy may be calculated using several methods. This report summarizes two perspectives and approaches: a high level scenario planning approach and a sophisticated financial cash flow analysis approach. The majority of the analysis in this report, however, focuses on the financial cash flow analysis approach; thus, it represents the perspective of a private investor in a wind energy project in each of the participating countries.

This analysis used a spreadsheet-based cash flow model developed by the Energy Research Centre of the Netherlands (ECN) to estimate the LCOE. The ECN model is a detailed discounted cash flow model used to represent the various cost structures in each of the participating countries from the perspective of a domestic financial investor in a wind energy project. The ECN model has been customized in this analysis to exclude country-specific wind energy incentives, resulting in unsubsidized LCOE estimates.

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Results of the analysis indicate that the unsubsidized LCOE varies considerably among countries represented in this study. As shown in Table ES-1, the country-specific LCOEs range from €61/MWh ($85/MWh) in Denmark to €120/MWh ($167/MWh) in Switzerland.

The magnitude of the unsubsidized LCOE variation has been attributed to differences in country-specific energy production, investment cost, operations cost, and financing cost. As expected, the largest LCOE impact from country to country was the anticipated energy production component that could be due to the inherent wind regime, site selection, wind turbine design, or other factors. Market forces such as electricity market structuring or the perception of risk in a wind project investment also impacted the LCOE through large variations in both capital expenditures and financing costs. Costs attributed to the operations of a wind project ranged broadly across countries and had a sizable LCOE impact as well, though caution with the reported data for operations and maintenance costs were common. The unique factors contributing to the variations in LCOE across countries are explored further in the comparative analysis and country-specific wind energy chapters of the report.

Lastly, an alternative approach to calculating LCOE is also briefly explored. For example, high-level planning scenarios may eschew a sophisticated discounted cash flow approach in favor of a simplified method to estimate LCOE. Under this simplified approach, assumptions for explicit financing terms and time-varying cash flows are not made, but instead a general discount rate is selected to represent all of the characteristics of the finance instrument. This more simplistic, high-level planning scenario approach minimizes the number of input parameters and the level of detail can facilitate LCOE comparisons among many different electric generation types. Therefore, the various methods in calculating LCOE require precise attention as to how, and from what perspective, the calculation is made, and comparisons should be made and interpreted carefully.

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Financial Cost of Wind Energy in Seven Countries

Introduction

In 2009, the European Union added 10,163 MW of new wind energy capacity while the United States added 9,994 MW (EWEA 2010, Wiser and Bolinger 2010). These capacity additions in 2009 represented the largest source of new electricity generation in the EU and the second largest in the U.S. (EWEA 2010, Wiser and Bolinger 2010). Globally, demand for wind-generated electricity has increased for a number of reasons including growing concern for carbon emission mitigation, security and supply issues with fossil-based fuels, and a host other factors.

The variability of the all-in cost of wind energy, however, may still be a barrier for increased deployment of wind energy across the globe. From the outset of project development, investors in wind energy have relatively certain knowledge of the plant’s lifetime cost of wind energy. This is because a wind energy project’s installed costs and mean wind speed are known early on, and wind generation generally has low variable costs, zero fuel cost, and no carbon emission costs. Even with these inherent characteristics, there are, however, wide variations in the cost of wind energy from project to project, within a country, and internationally. That is the focus of this effort.

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Objective and Approach

Using a multi-national case-study approach, this work seeks to understand the source of wind energy cost differences across seven countries under International Energy Agency (IEA) Wind Task 26 – Cost of Wind Energy. The participating countries include Denmark, Germany, the Netherlands, Spain, Sweden, Switzerland, and the United States.

Assessing the cost of wind energy requires evaluation of a number of components including investment cost, operation cost, finance cost, and annual energy production, and how these cost streams vary over the life of the project. Representation of each of the different temporal cost parameters as a single descriptive value may be accomplished using a variety of methods and approaches. For this project, we considered the levelized cost of energy (LCOE) as the primary metric for describing and comparing wind energy costs. The LCOE represents the sum of all costs over the lifetime of a given wind project, discounted to the present time, and levelized based on annual energy production. Furthermore, the LCOE can be calculated with a number of different methods or approaches to represent several differing perspectives. This report describes two of these perspectives and approaches - a high level scenario planning approach and a sophisticated financial cash flow analysis approach.

The majority of the analysis in this report focuses on assessing the cost of wind-generated electricity, from the perspective of a private investor, in a given wind project, in each of the represented countries. More specifically, the LCOE analysis in this report represents the country-specific financial cost of wind energy for a domestic investor financing their project using the adopted model and methodology. It is important to note that the financial cost comparisons are not a socio-economic cost evaluation of wind energy (i.e., the cost to society of this particular form of energy).

When calculating the financial cost of wind energy, this analysis tabulates all of the expenditures required to install, operate, and finance a wind project. In addition to assessing the pure cost of wind energy, this analysis also describes the revenues and wind energy incentives that are available to wind project owners in each of the represented countries. Differences that arise in cost elements among the countries are identified.

This report begins with a brief description of the cost elements that comprise the levelized cost of energy. Then, the spreadsheet model developed under the auspices of this project is described. Based on the data provided by each represented country, a Reference Case is defined to provide a common point of comparison among countries. The cost elements from each country are compared to the Reference Case to identify the source of the differences in levelized cost of wind energy. The next section briefly identifies an alternative method, from the private investor perspective, to calculating levelized cost of wind energy. The report then presents different LCOE estimates, based on the cost elements defined in the Reference Case, to demonstrate the variability in LCOE associated with the different methods. Finally, each of the participating countries provided a chapter that summarizes the cost elements of a typical wind project in their country. These constitute the bulk of this report.

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Levelized Cost of Wind Energy

Cost Elements

The principal components of the cost of wind energy include capital investment, operation and maintenance, and finance. Within each category, a number of elements are included and Appendix A describes the individual cost elements considered in this report.

Wind projects require a significant capital investment comprised of a number of other costs beyond the turbines alone. However, as shown in Table 1, approximately 75% of the total investment cost is associated with the cost of the wind turbines. Other costs include grid connection, foundations, installation, and construction-related expenses, summarized as percentages in Table 1-1. These are based on a selection of data from Germany, Denmark, Spain, and the UK. Decommissioning costs are set aside at the initiation of a project and these are included in the initial capital investment because they are required by some countries.

Operation and maintenance (O&M) costs contribute to the total cost of wind energy. A portion of these costs typically include fixed costs representing insurance, administration, and service contracts for scheduled maintenance. Variable O&M costs typically include scheduled and unscheduled maintenance and component replacement. These costs vary from one year to another; therefore, estimates often are made by assuming a constant cash flow stream over the life of the project. Since wind projects do not require annual fuel expenditures, O&M costs constitute the majority of annual costs. In some electricity markets, operating costs associated with power system services, such as reactive power compensation, are required for wind projects.

Finally, finance costs are a significant portion of the levelized cost of energy. The type of finance structures that are used to support construction of wind projects, and the associated levels of debt and equity contributors, vary among countries. The corresponding expected returns, by debt or equity investment providers, also vary significantly. In addition, each country’s corporate tax structure influences the total financial costs associated with wind projects.

Figure 1-1 illustrates the various components included in an estimate of the cost of wind energy. The upfront investment costs, annual O&M costs, and financial variables are included. Because wind projects ultimately produce electricity, it is important to normalize the levelized cost with annual electricity production. Energy production depends on the wind turbines physical characteristics and the wind resource characteristics at a given project site.

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Revenues and Incentives

Electricity is the product sold by a wind project owner, and the markets for electricity vary by country. While this project focuses on the costs associated with generation of electricity from wind power plants, the revenues and incentives in each of the electric markets represented are summarized. In addition to revenue from electricity sales, a variety of incentives are employed to assure that the costs of wind-generated electricity are recovered. These incentives include feed-in tariffs, production-based tax credits, renewable energy certificates, or other mechanisms.

Externalities

A number of aspects to wind-generated electricity are not currently monetized and thus, are not included in an assessment of revenues or cost. These externalities, or societal costs, are associated with secondary impacts from electricity generation technologies. In general, renewable technologies have very low external impacts compared to conventional generation technologies. The IEA Renewable Energy Costs and Benefits for Society (RECaBS) project estimates the costs and benefits of electricity generation from renewable sources compared to those of conventional generators using a transparent methodology (RECaBs 2007). According to the ReCABS methodology, the analysis includes five externalities:

 “Climate change; greenhouse gasses, in particular CO2 and CH4

 Other air pollutants: SOx, NOx, and particles

 Grid integration; primarily added costs to the electrical infrastructure including power balancing costs and reduced capacity value of wind turbines

 Security of fuel supply; substitution of fuel imports with indigenous resources.

In addition to the externalities described above, electricity generation from wind does not rely on fuel consumption and the associated volatility of fuel prices. The investment risks for wind technology differ from the risk profile of fossil-fuel generation technologies. All of these characteristics create an important difference in the value proposition for wind technology relative to other generation technologies, but this study does not attempt to make such comparative assessments…

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Cost of Onshore Wind Energy in Participating Countries

The following section presents the country-specific financial cost of onshore wind energy for a domestic investor financing their project in each of the seven participating countries. This uses the ECN model and methodology. Cross-country comparisons of key onshore wind energy cost variables identify differences among each of the countries and offer a baseline onshore wind energy project cost. Due to limited available data, the cost of offshore wind energy is not presented in detail; however, a small sample of reported cost data is included.

Limitations of Reported Data

It is critical to note that, within this analysis, extensive efforts were made to verify the accuracy and validity of all collected wind energy costs, performance, and financial data. However, due to the numerous and diverse sources of data, the quality of the reported data varies among countries and sources. For example, reported cost data are intended to be presented in €2008, though in some instances, it is unclear whether they are presented in current or constant prices. Similarly, the parameters listed below are intended to be reflective of a wind project constructed in 2008; however, it is likely that some of the components were in fact ordered and paid for prior to 2008. Data limitations prevented correction of this possible discrepancy. Furthermore, while IEA Task 26 aims to represent a “typical” project from each country, the actual cost of wind energy is site
and project specific. Therefore, the following data are presented as illustrative of overall country-specific conditions only and should be considered with this in mind…

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Cost of Offshore Wind Energy in Participating Countries

In addition to onshore wind, the ECN model can estimate LCOE for offshore wind installations. At this time, however, very limited offshore data is available; particularly the full suite of input variables that are necessary to estimate country-specific LCOE. As such, cross-country LCOE comparisons for offshore wind are not made, nor is an offshore Reference Case constructed. Some reported cost and financing data are presented in Tables 1-5 and 1-6 below. It is important to note that, in Denmark, connecting to the grid and the necessity of a sea cable are socialized costs and, therefore, not borne by the project developer. Because the model used in this analysis is from the perspective of the project developer, these costs are not captured in the Danish investment cost estimate. Although not used in the modeling analysis, the inclusion of these grid connection costs would increase the Danish investment cost estimate to approximately €3,000/kW. Table 1-7 shows the LCOE and financial gap estimated for these offshore wind energy projects…

Conclusions

Results of IEA Wind Task 26 indicate that the LCOE varies considerably between countries. The magnitude of this variation has been attributed to energy production, investment cost, operations cost, and financing cost. As expected, the largest LCOE impacts, from country to country, were the anticipated energy production based on the inherent wind regime or wind turbine technology specifications. Market forces greatly impacted the overall cost of wind energy through large variations in both capital expenditures and differences in financing terms for a wind project. Costs attributed to the operation of a wind project ranged widely across countries and had a sizable LCOE impact.

The nature of LCOE, as a single overall metric descriptive of the cost of energy, allows for seemingly simple comparisons to be made across countries, purposes, audiences, and other uses. However, the various methods of calculating LCOE require careful attention to precisely how, and from what perspective, the calculation is made. LCOE is not a universal, interchangeable calculation. Rather, LCOE is an informative and useful tool that can be adapted to a particular need. Therefore, comparisons should be made and interpreted carefully…

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Summary of Wind Projects in Denmark

Interest in investing and deploying onshore wind turbines has been revived since the introduction of new regulations for remuneration of wind turbines in 2008. Even though interest in onshore wind power is increasing, government focus is firmly on introducing offshore wind farms. A short term target of 800 MW of offshore wind capacity by the end of 2012 was set in 2008. The land based target was set at 175 MW for new onshore capacity and 175 MW for repowered capacity.

The cost of wind power in Denmark is lower than the Reference Case primarily due to lower investment costs, but lower financial and operational costs contribute as well. The cost of onshore wind power is expected to be lower in the near future due to lower prices for turbines. Early indications are that the levelized cost for wind power in 2009 was €59/MWh ($82/MWh) compared with €61/MWh ($85/MWh) in 2008. This primarily is due to lower turbine costs, but the financial gain of cheaper turbines has been reduced by lower electricity prices. The financial gap for turbines erected in 2009 is estimated to be -€5/MWh (-$7/MWh). Despite this slight decrease, onshore wind power in Denmark remains an attractive investment under the current feed-in tariff.

The levelized costs for offshore are calculated on the basis of the winning bid price for each project. The cost of offshore wind power in Denmark increased by 15% in 2008 compared to 2007. This most likely was due to increasing turbine costs and bottlenecks in the supply of offshore construction vessels, higher cable prices, and increasing costs for steel and commodities. Table 2-8 below provides a summary of the cost of wind power in 2007 and 2008.

Though prices have fallen for components and raw materials since 2008, along with the appearance on the market of more offshore turbines, the cost of offshore wind power in Denmark is expected to increase. This is due partially to the availability of increasingly higher subsidies in the United Kingdom and Germany, which has increased the opportunity costs of investing in Danish offshore projects. Other reasons for increasing prices are the small market for offshore wind in Denmark in comparison to the major European offshore markets; the policy of tendering single offshore projects with relatively long intervals between tenders, which increases transaction costs for bidders; and the low level of competition in the bidding process (only two major market participants exist in the Danish offshore sector). The division of risk in the Danish concessionary process appears to be an important factor in increasing the cost of offshore wind power in Denmark and reducing the attractiveness of the Danish offshore power market for investors.

Another reason for the increased costs of offshore wind power in Denmark is that companies may have submitted bids at breakeven prices or very low levels of income to gain experience with offshore wind power so they can profit from the experience in more lucrative markets, such as the UK. This would make the levelized cost predictions in Table 2-8 lower than they are in reality.

There also are indications that the budgeting of offshore wind farms has been problematic and that many have overreached the original budget. If this is the case, then the calculation of the levelized costs based on the original bid price would result in a lower levelized cost than in reality.

The winning bid price for the 400 MW Anholt offshore wind farm was €141/MWh ($196/MWh). This represents a doubling of the price the state pays for offshore wind power compared to 2007.

Technical issues such as increasing distances from shore, and sites in deeper water, may also influence future investment costs, but these may be offset by technical improvements and learning curves.

It is likely that government-sponsored concessions to produce offshore wind power will make up the bulk of offshore investments in the future. The economics of “open door” offshore plants are generally not attractive unless they are situated very near the coast and are in very shallow water, so called “feet in the water” projects…

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Summary [Germany]

The chosen German onshore wind farm example consists of five wind turbines with a rated power of 2 MW. The full-load hours of the project are assumed to be 2,260. The model assumptions led to an estimated LCOE of €85/MWh ($118/MWh). The offered feed-in tariff results in a financial gap of approximately €5/MWh ($7/MWh) for the project developer. The level of the tariffs is regulated in the EEG…

Summary [Netherlands]

The Netherlands has ambitious targets for onshore and offshore wind energy, both for the near future and for 2020. The current SDE feed-in scheme is the most important tool in realizing this. From the analysis in section 3, it follows that the financial gap in the case of the Netherlands is not significant. The subsidized electricity production is limited to 2,200 full load hours. Although this number is in line with the Dutch wind regime, there is limited incentive to produce more than 2,200 hours. The lower investment costs might be a result of this. O&M costs are relatively high due to the land cost component.

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Summary of Wind Projects in Spain…Summary of Wind Projects in Sweden

As Table 6-7 shows, wind power projects in Sweden appear to have a relatively low weighted average cost of capital (WACC) as a result of low equity and debt costs. Projects are financed with large shares of debt financing. Loans are financed for 20 years. Although parts of these loans are probably of shorter duration, they are rolled over at the end of the lending period.

Wind power has a long history in Sweden and is growing quite rapidly. This growth is necessary to achieve the overall goal of 25 TWh from renewable energy sources by 2020.

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Summary [Switzerland]…Summary of Wind Projects in the U.S.

In recent years, wind energy capacity in the United States has expanded rapidly. This was a result of an excellent wind regime, comparatively low costs, sufficient revenue sources, and favorable policy incentives, when available. While all wind energy developed to date in the United States has been onshore, the first offshore projects in the United States are progressing. The costs of wind energy in the United States are generally lower than the Reference Case primarily due to greater energy output, lower capital costs, and lower O&M expenditures. U.S. federal government policy incentives for wind energy, when authorized politically, have driven development in many, but not all, parts of the country. Taken together, the revenue and policy incentives result in a near zero financial gap for a wind energy project developer.